Home Depot gains hint at housing market recovery
Home Depot shares rose nearly 4 percent Tuesday after the home improvement company beat earnings expectations in the third quarter. Glimmers of a housing market recovery and preparations for Superstorm Sandy contributed to Home Depot's strong perfomance.
Home Depot Inc.'s net income rose slightly in the third-quarter, as glimmers of a housing market recovery and storm-preparation added to sales and offset costs related to closing stores in China.
Results beat expectations and the company also raised its forecast for the year. Shares rose nearly 4 percent.
Home improvement companies have long been under pressure due to the weak housing market, as consumers cut back on large-scale renovation projects. But they stand ready to benefit as evidence mounts that the housing market is slowly improving.
Superstorm Sandy also spurred sales, but executives were cautious about forecasting how much they thought they would benefit from the storm due to the extensive damage and slow recovery.
"Our customers are still very much in turmoil," said CFO Carol Tome.
Sandy devastated the East Coast at the end of October, shortly after the quarter ended. Its damage was still being dealt with, as evidenced by one question from an analyst.
In the last week of the third quarter, the company garnered a $70 million lift from sales of batteries and flashlights, generators and extension cords.
Ultimately the company said it expects Sandy will generate about as much revenue as last year's Hurricane Irene, which garnered $360 million in sales off of $16 billion in hurricane damage. Sandy has caused $20 billion in damage, so sales could be greater. But they're different types of storms, with Irene causing more wind damage and Sandy causing more flooding, so the total benefit and timing is uncertain.
The slowly improving housing market was another focus for the quarter. Data is mounting that the housing market is slowly improving, with U.S. home prices and new home sales pace increasing, although they remain well below peak levels.
Home Depot's CEO Frank Blake said that contributed to quarterly results.
"Our third-quarter results were better than we expected and reflected, in part, what we believe is the start of the path toward the healing of the housing market," he said in a statement.
In a call with analysts, he added that he sees the housing market becoming "an assist to our growth rather than an anchor."
Customer transactions over $900, about 20 percent of sales, rose 4.3 percent during the quarter, driven by purchases of appliances, flooring and kitchens.
Blake's statement signaled a "stronger tone" on the housing market than in prior quarters, said NBG Productions analyst Brian S. Sozzi, who called the remarks encouraging.
It remains to be seen whether Home Depot's smaller rival Lowe's Cos. will echo the sentiment when reports results on Monday.
For the period ended Oct. 28, Home Depot Inc. reported net income of $947 million, or 63 cents per share. That's up from $934 billion, or 60 cents per share, a year earlier.
Excluding a charge for closing some stores in China, earnings were 74 cents per share.
Home Depot had said during the quarter it would close its big-box stores in China after failing to make a dent in the market.
"After several years of effort, we concluded that we could not make our big box retail model profitable there," Blake said.
That topped the 70 cents per share that analysts surveyed by FactSet predicted.
Revenue rose more than 4 percent to $18.13 billion. Wall Street expected $17.92 billion.
For the year, Home Depot now expects net income of $3.03 excluding the costs of closing stores in China, reflecting share repurchases. It previously forecast $2.95 per share.
It expects anticipates revenue will climb about 5.2 percent. Based on 2011's revenue of $70.4 billion, this implies $74.06 billion.Home Depot's prior forecast was for a 4.6 percent increase, which implied revenue of $73.63 billion.
Analysts expect earnings of $2.99 per share on revenue of $73.68 billion.
Shares rose $2.22, or 3.6 percent, to close at $63.38 Tuesday after rising to a new high for the year of $64.44 earlier in the session.